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Norway’s shame: How a nation squandered its oil riches

Public Policy

Here’s a warning to America: Even a rich nation can be bled dry … by pandering to those who won’t work

Some 50 years ago, Njord, the mythological Norsk god of wealth, smiled on the hardworking fishermen and lumberjacks, and presented Norway with the gift of oil. In financial terms, this was a handsome gift indeed, currently translated into a natural bounty worth $740 billion.

Successive Norwegian governments pledged to save this wealth for the welfare of future generations. Yet, half a century after this windfall began, questions increasingly arise of whether Norway’s handling of its oil wealth has even withstood the test of the past, much less the future.

The country’s 2013 election campaign spawned a debate about the government’s management of the massive Norwegian Oil Fund. Norwegian citizens, however, have been trapped within a virtual bubble: Far from raising and discussing serious concerns, the debate in which the country has been engaged is fundamentally flawed. Behind the rosy picture that Norway’s leaders have painted of the country’s economy lie some difficult truths. We have only to chip away a little at this bright facade to realize that a far less glittering reality lies beneath the surface.

First, the oil fund is a mathematical artifice. At three-quarters of a trillion dollars, the Norwegian Oil Fund appears to provide plenty for a country with scarcely 5 million citizens. Yet the country has accumulated a foreign debt that, at $657 billion, is almost as massive. Subtracting the debt from the fund’s $740 billion leaves a balance of only $83 billion. In other words, there is a treasure chest, but it is almost empty: Njord’s prize for future generations is only a little more than 10 percent of its putative value.

Even if we take the fund’s worth at face value, its future is not guaranteed. In a 2011 analysis, “What Does Norway Get Out Of Its Oil Fund, if Not More Strategic Infrastructure Investment?” University of Missouri economist and Wall Street financial analyst Michael Hudson offered a stark assessment: The Norwegian oil monies are invested mainly in the unstable economies of Brazil, Russia, India and China, or in volatile real estate in the West.

Although the fund records short-term profits from its holdings of bond and stocks, its strategy is one of “speculate and diversify.” It is based on the hope that spreading the risk widely enough can hedge against a catastrophic collapse in a particular region or sector. Yet in today’s turbulent economic environment, this seems to be a strategy for multiplying exposure to speculative risks rather than protecting against them. Thus, not only does Norway’s massive debt render the fund’s true value largely illusory, the future of the fund itself is highly precarious.

The second awkward fact Norwegians have yet to confront is that their country’s disproportionate dependence on oil hangs like an economic sword of Damocles above its head. In August, the Economist predicted that following improvements in shale-gas technologies and the development of electric cars, a significant decrease in the demand for oil is rapidly approaching. Although marginally referenced in the Norwegian Finance Ministry’s most recent self-congratulatory white paper, “Long-term Perspectives on the Norwegian Economy 2013,” Norway’s administrators chose to gloss over this glaring issue, preferring the relative safety of a somewhat theoretical and speculative prognostication about the country’s economy in 2035-2060.

If technical improvements in the field of alternative energy indeed continue, and if forecasts of an imminent and substantial drop in demand for oil is correct, the consequences for Norway could be catastrophic. Its gross domestic product (GDP), today concentrated on oil and its derivatives, could collapse. Its exports will crash, and with its current massive levels of public-sector spending, the important ratio of public debt to GDP — currently at around 30 percent — will spiral, bringing the country close to default. Norway could, very quickly, find itself in a much worse economic state than it was before the discovery of oil.

The flip side of this dependence on oil provides the third major structural weakness in the Norwegian economy: The country’s non-oil industrial infrastructure has been seriously neglected. Although the election campaign yielded talk of improving it, such plans may be too little and too late. Oil and its related industries drain the labor force, driving up labor costs as relatively few hands are available for more productive sectors.

Moreover, the accountants and bankers who manage the oil fund claim that spending too much on domestic infrastructure and investments in industrial production would overwhelm the small local economy and cause inflation. Incredibly, only 4 percent of the fund may be utilized for such purposes. This compares with the 60 percent that Mr. Hudson recommends be used for direct investments in domestic and regional enterprises to ensure that the Norwegian economy is viable after the oil wells run dry.

The Norwegian people are understandably proud of the massive nest egg they think they possess. The truth hidden from ordinary Norwegians is that much of the country’s oil bounty has already been squandered. If Norway is to avoid being drawn inexorably into the abyss, it must fundamentally reassess its policies and learn the lessons of the global developments that have affected the world of finance and real estate since the 1960s.

After 50 years of complacency, time is now working against the Norwegian people. Njord is no longer smiling on them, but will they notice?

Washington Times


16 Comments on "Norway’s shame: How a nation squandered its oil riches"

  1. paulo1 on Thu, 26th Dec 2013 1:51 pm 

    re: “In other words, there is a treasure chest, but it is almost empty: Njord’s prize for future generations is only a little more than 10 percent of its putative value”.

    Gee, stack this up against Britain’s non-existent treasure chest of their North Sea windfall, and it doesn’t look too bad from where I stand. At least they are one country that has enough in the bank to cover current bills. Compare that to USA, Japan, whoever….and it doesn’t look so bad. I would think some article writer is pounding the ‘I hate socialism drum’.

    Clearly, all countries have to change their lifestyles of expectations, but Norway did not funnel their windfall into private pockets beyond current benefits of employment and excellent services. Nor did they pretend to be a world power like Britain, or attempt to maintain empire like USA or Russia. Could they have done better with their funds? Sure. Could they have done worse? Well, just look around.

    Where did I read where 70% of lottery winners are broke within a few years? Britain certainly is. USA, with their vast resource deposits of all kinds spent theirs like those ‘weekly benefits for life’ winners. They’re all broke.

    Time to stop pointing fingers and prepare for those chickens coming home to roost. Time to look after our own individual preparations. Haven’t all Govts. been letting us down the last 50 years?

    regards….Paulo

  2. DC on Thu, 26th Dec 2013 3:10 pm 

    Look at the source of this piece, the W.T’s. I would question both the facts AND the conclusions, which are stated rather baldly right off the bat.

    “Here’s a warning to America: Even a rich nation can be bled dry … by pandering to those who won’t work”

    You cant get much clearer than what the WT real concern here is. Its not how a country that 95% of amerikans couldnt locate manages its it oil funds, but rather *how* it does. Sovereign wealth funds are actually quite a popular concept, even in market totalitarian amerika. Although not widely discussed in corporate-controlled amerika, a few amerikans are aware of the concept of not-for-private-profit oil. The WT, therefore, is of naturally going to pour as much cold water on Norway as it possibly can, least the unwashed masses start to wonder why something similar cant happen in the Corporate War-states of Amerika itself.

    So, the WT gets to beat up on Norway for using its oil wealth to fund public services(you know, for its vast population of non-working freeloaders that Norway is famous for) AND for allegedly(?) not even being well managed. The united snakes, it is worth reminding, is no paragon of fiscal prudence in ANY sense of the word.

    This story, bad as it is, does have a slight ring of truth. Alberta’s(Peter Loughheed), in a more enlightened time, set up the Heritage Fund, basically a mini sovereign wealth fund. For a while, it built up some funds, but it actually was over, time, poorly managed and poorly implemented for a variety of reasons. Not unlike what the WT claims Norway is doing now. A claim the WT does little to back up.

    From 1976 to 1987 it was funded by oil revenues, but since 1987 not a dime in resource royalty gone into the fund. It currently has 16 billion(which doesnt buy you much these days) or so left and it is expected to be fully spent, likely within the decade.

    IF the Wash Times wants to see an example of how to really screw up a sovereign wealth fund, they should look at Alberta, not Norway. But they proably wouldnt care for Alberta much either since they spent a lot of it on subversive marxist programs like hospitals, education, paved streets for poor people and so on. However, the WT can take heart that successive neo-lib govts in Alberta are busy squandering the fund on interest payments for its reckless deficit spending.

    http://thetyee.ca/Opinion/2011/04/13/HarpersBigQuestion/print.html

  3. Arthur on Thu, 26th Dec 2013 4:23 pm 

    Holland is in much the same situation as Norway. Just like Norway discovered it’s oil 50 years ago, Holland discovered the largest gasfield and 10th largest in the world in ca. 1960:

    http://en.wikipedia.org/wiki/Groningen_gas_field

    Total size: 3 trillion m3, or ca. 2 trillion euro against current market end prices, that is ca. four times the present GDP. Both Norway and the Netherlands enjoyed generous social security systems as a result of it.

    Meanwhile, 60% of the gas is now gone and unlike Denmark, Germany, Italy and Spain, countries without excessive natural resources, predictably both Norway and Holland are lagging behind in the energy transition race, although the populations of both countries do sincerely support ‘green energy’. The Norwegians are lucky that 100% of their electricity already comes from hydro, but the Dutch have no such luck, our country being ‘flat as a pancake’. The writing is on the wall. The marketing phrase coming from The Hague to sell the new situation is ‘participatie-maatschappij’/’participation society’, which means: soon there will be no money to fund all the goodies like in the past, so better be prepared. There will be severe cuts in well-fare and drastic increase of retirement ages, now 68, soon 70+.

    Up until 2009 Norway (2) and the Netherlands (7) ranked high on gdp/capita list:

    nl . wikipedia . org/wiki/Lijst_van_landen_naar_bbp_per_hoofd_van_de_bevolking

    Both countries will probably witness a steep decline in the coming years.

    The future belongs to those who will achieve the energy transition first. Most likely candidates, those 4 European countries mentioned above, not ‘blessed’ (read: spoiled) with a free carbon lunch.

  4. Bob Inget on Thu, 26th Dec 2013 7:05 pm 

    ” a stark assessment: The Norwegian oil monies are invested mainly in the unstable economies of Brazil, Russia, India and China, or in volatile real estate in the West”.

    Unstable?

    I believe the author fears other oil producing democracies may follow this, Norway’s, model of investing..

    One only needs know what Saudi Arabia
    is investing in;

    http://www.npr.org/blogs/parallels/2013/11/20/246330248/saudi-arabias-global-arms-shopping-spree

    http://www.bbc.co.uk/news/world-middle-east-24823846

    http://www.foreignpolicy.com/articles/2013/12/12/why_is_saudi_arabia_buying_15000_us_anti_tank_missiles_for_a_land_war_it_will_ne#sthash.ygEHVxV3.dpbs

  5. Dave Thompson on Thu, 26th Dec 2013 7:21 pm 

    Great example proving once again my true theory of economy. + or – economic growth = energy inputs. Works both ways, + or – energy inputs = economy. Money is a means of exchange, counting how money is used is a diversion from the truth. The corporate masters want our attention kept away from the man behind the curtain with the energy input controls.

  6. noobtube on Thu, 26th Dec 2013 7:23 pm 

    Look at that.

    The so-called racially superior Europeans and Americans who constantly scream about Democracy and Freedom, can’t manage to do any better than any other place on the planet.

    In Africa, the people get crumbs from the oil “benefits” that burns in the SUVs and jets of the Europeans and Americans who stole it from them.

    Europeans and Americans are monstrous stewards of the world’s irreplaceable minerals, wildlife, soils, and waters.

    It doesn’t matter where they go. These Americans and Europeans bring their lust for destruction with them.

    That must be what makes them so racially superior to everyone else.

    “murder-kill-destroy” is the mantra of the advanced, developed, civilized, 1st world, cultured, industrial societies.

  7. MrEnergyCzar on Thu, 26th Dec 2013 8:06 pm 

    Their grid is 99.9% renewable and 10% of their new car purchases are plug-in electrics… they’ll be fine…

    MrEnergyCzar

  8. J-Gav on Thu, 26th Dec 2013 8:36 pm 

    Norway has mismanaged their bounty just as everyone else with any has done – but somewhat less so. They’ve always been in the top five of the well-being index so, before we puke on them, perhaps we should do a little soul-searching in whatever other country we live in …

  9. Arthur on Thu, 26th Dec 2013 10:32 pm 

    Europeans and Americans are monstrous stewards of the world’s irreplaceable minerals, wildlife, soils, and waters.

    There will come a day when you people will beg for the ‘monsters’ to return.

    http://content.time.com/time/world/article/0,8599,1713275,00.html

  10. Makati1 on Fri, 27th Dec 2013 12:47 am 

    Arthur, no they won’t. Time is a mouthpiece of the MSM Ministry of Propaganda. You live in Europe, the plunderers preceding the US Empire. YOU have benefited by that plundering. Most of Europe would still be 3rd world without it. Only the US had the natural resources to stand alone for a long time. Those days are over. The ladder for the West is only down, not up. Wait and see.

  11. DC on Fri, 27th Dec 2013 1:01 am 

    Seriously Arthur? a TIME OP-ED? And not even a good one at that….

    I mean sure, could ‘we’ have done a better job engaging the third world as somewhat equals? Possibly, but our ancestors found Grand Theft Resource a much more lucrative undertaking. And look what we did with all that wealth, built a billion gas-burning cars and squandered most of the rest on suburbia, I-junks and ‘supper-carrier’ battlegroups and fission power plants. At least if we’d done something remotely sustainable and tried to give something back, even a little.

    But no, instead were doubling down on war, coal, and the gas powered car. China backed the ‘western’ model of ‘development’. And just yesterday, the national news ran a story about a single mother in China that wants to move out of Beijing and into the countryside for her sons sake.Like you, I used to think that modern western civilization was the end-all-be-all. Ive made my peace with the idea that were anything but. To each his own though…

  12. GregT on Fri, 27th Dec 2013 2:29 am 

    When we figure out how to grow steel, aluminum, copper and thermoplastics from current sunlight, that is when the grid will become ‘renewable’.

    There are two kinds of resources on the planet Earth, finite resources and renewable resources. Anything that uses up finite resources in it’s construction, is by definition, non renewable.

  13. Newfie on Fri, 27th Dec 2013 5:03 am 

    Um… Excuse me, but… America is $15 trillion in the hole. Norway is rich by comparison.

  14. Arthur on Fri, 27th Dec 2013 8:27 am 

    Europeans put a man on the moon, the others had the penis sheath as their greatest cultural achievement. That’s the difference.

    The car has no future, nor the carrier battle groups, the JSF fighter planes or the rest of the MIC. Fine. Old skool economic growth will not return. Accepted. We are not returning to the moon any time soon, if ever. We are going to witness an enormous economic contraction.

    On the other hand… there will be a bottom level from where we can stop the decay. The technology for that purpose already exists. Metals can be recycled. Wind, solar and hydro can provide energy. And if you want to travel, use you ‘iCrap’ and do it virtually.

    We will continue to live in homes. Central heating will be replaced by a thermo skin of 40 Watts, food will come from Israeli style kibbutz community gardens.

  15. Makati1 on Fri, 27th Dec 2013 10:22 am 

    Hahahaha..and Arthur, that European ‘advantage’ came from plundering the America’s, India, China, Philippines, Africa, etc., NOT from real industrious work. Plunder and slaves for centuries.

    I have been watching the history of the European countries and they were barbarians until they started their plundering and colonization of the rest of the world.

    They can be thankful that most of the world of the time was peaceful and not adventurers or your ancestors may have been picking cotton in the Americas. Europe has always had the plundering genes and passed them on to the US where it has become a fine art, soon to end when there is nothing left.

  16. Arthur on Fri, 27th Dec 2013 12:41 pm 

    Hahahaha..and Arthur, that European ‘advantage’ came from plundering the America’s, India, China, Philippines, Africa, etc., NOT from real industrious work.

    Absolute rubbish. The European advantage came and comes from scientific and technological culture and very hard work, not from a few stupid coffee beans, tea, pepper and cotton.

    I have been watching the history of the European countries and they were barbarians until they started their plundering and colonization of the rest of the world.

    What do you mean, ‘they’? You start to sound like noobtube. You once said you are of German-American ancestry yourself. Trying to occupy the ‘moral high ground’ here, based on what? Or are you (half) Filipino after all, which would justify the ‘they’… and explain your trek to the Philippines?

    They can be thankful that most of the world of the time was peaceful and not adventurers or your ancestors may have been picking cotton in the Americas. Europe has always had the plundering genes and passed them on to the US where it has become a fine art, soon to end when there is nothing left.

    ‘your ancestors’… how about yours?

    Whatever wrongs the Europeans may have done in the past, they have created a society most non-Europeans aspire to live in, if they get the chance, at least as far as the material aspect is concerned.

    Sure the Europeans exploited/developed/’plundered’ the planet, take your pick. The rest was too incompetent to do the same, but would have, if they could. Currently, it are the Europeans, nobody else, who are realizing that we cannot go on like this, best symbolized in the work of the Club of Rome. And it will be Europeans who will come up with ‘solutions’ for the coming resource depleted era.

    P.S. when I say ‘Europeans’, I mean EU + north-America.

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